Stocks Plummet as Inflation Hits a 40-year Record 8.6%
Hopes that inflation had peaked were short lived. Friday’s Consumer Price Index report came in hotter than expected at 8.6% annually. Inflation is now at a new 40-year high. It is sparking fears of drastic new rate hikes. As a result, stock markets are falling all over the world. The Dow sank over 800 points. The S&P 500 is now more than 20% below its all-time high set in January. That officially puts it into bear market territory.1
Inflation is the central economic issue. The pandemic and Ukraine war have all but disappeared from economic discussions. The fear is that inflation has become entrenched in the economy. It has moved beyond drivers such as supply chains snarls and energy shocks.
Federal Reserve officials will meet on Tuesday and Wednesday to discuss their next monetary policy move. The Federal Open Market Committee is widely expected to announce at least a 50-basis-point hike. They have already raised rates twice this year. The Fed had signaled they would do 50-basis-points in June and July. But with inflation hitting 8.6%, two banks, Barclays and Jefferies, are now forecasting a raise of 75-basis-points. Analysts think that if they do 75, that’s a sign that the Fed is panicking.2
The shocking new inflation number has caused some to suggest a full-percentage point hike is now possible.
“The Fed’s trying to erase any perception that they’re behind the curve,” said Steven Englander, global head of G-10 FX research at Standard Chartered Bank. “Fifty was the big round number six months ago. Meanwhile, 75 is a very middling type of hike. So the Fed might say: ‘Look, if we want to show commitment, let’s just do 100.’” Once the extreme, 50 basis points has now become the expectation. “The Fed has been remarkably successful in having 50 the baseline,” Englander said. “Fifty was the neutron bomb even six months ago.”3
Inflation Leading to Recession
Meanwhile, the U.S. 2-year Treasury yield hit its highest level since 2007 on Monday morning. It outstripped the 10-year rate for the first time since April. An inversion like this is often seen as a sign of an impending recession. The bond yield curve inverted on fears that more aggressive rate hikes will stagnate the economy. Record low consumer confidence was also reported on Friday. The outlook for growth looks abysmal based on this data. Instead, a recession seems likely. Morgan Stanley CEO James Gorman said, “It’s possible we go into recession, obviously, probably 50-50 odds now.” That’s up from his earlier 30% recession-risk estimate.4
Top economist Mohamed El-Erian predicts a period of stagflation. For companies, the toxic economic situation means falling profits and earnings ahead. The former CEO of Pimco, El-Erian warns investors to be cautious. “If I were fully invested right now, I would take some chips off the table,” he said. Gorman added on, “You know that it’s going to be bumpy; people’s 401(k) plans are going to be down this year.”5
Some investors are moving their money into dollars. They are choosing the currency over the non-interest-yielding gold. The dollar may benefit from rapidly rising interest rates. However, it is still subject to market whims. Fahad Kamal, chief investment officer at Kleinwort Hambros said, “Clearly commodities are one area which is reasonably good at protecting you from inflation over the long run.” In this market, buying opportunities will be opening up for gold. This will give investors better access to safe haven assets that can preserve value. Precious metals are a long-term store of wealth that can endure the impending downturn. To learn more about what a Gold IRA can do for you, contact American Hartford Gold today.